Morgan Stanley’s “20 for 2016″ Includes Three for EM

By Ben Levisohn

Morgan Stanley released a report called “20 for 2016″ today, in which it purports to pick its favorite 20 stocks to own for the next three years. Three specifically mention business in the emerging markets.

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The companies were chosen by Morgan Stanley’s analysts for being the highest-quality stocks among those they cover. When Morgan Stanley says quality it means sustainability “of competitive advantages, business model, pricing power, cost efficiency, and growth.” And while they’re not necessarily the best values in the market, they’re the ones Morgan Stanley believes will have “increasingly differentiated” business models and market positions three years hence.

Among the companies–which includes such well-known names as Amazon.com (AMZN) and J.P. Morgan Chase (JPM)–three specifically mention emerging markets: American Tower (AMT), Estee Lauder (EL) and Philip Morris International (PM). Here’s why they were selected.

American Tower

Cell towers are Morgan Stanley’s preferred way of playing wireless, because the companies have “very stable with long-term contracts, almost automatic renewals, rate escalators, low capital expenditures, high margins, strong-credit tenants, and high barriers to entry.” And what sets American Tower apart is its emerging-markets business, which will drive future growth. Morgan Stanley’s Simon Flannery writes:

American Tower generates ~32% of site leasing revenue from emerging markets. We remain cautious about the less favorable trends abroad — less-mature wireless industry, political instability, lack of zoning / property / land use rights, and currency volatility. However, management believes that international site leasing revenue will organically grow 8% to 11% per year. Brazil, Colombia, Mexico, and South Africa are deploying 3G and in the early phases of 4G (2 to 5 years behind the US), while Ghana and India are in the early phases of 3G (6 to 10 years behind).

Estee Lauder

Dara Mohsenian notes that the company traded at a premium to peers, but says it’s a well deserved one. She writes:

We forecast low-teens (%) long-term EPS growth, vs. high single digits for peers, driven by higher top-line and margin expansion. We project 6% long-term organic revenue growth for Estée, which is at the very high end of our HPC coverage, driven by Estée’s exposure to high-growth prestige beauty product categories and market share gains, with strong growth in emerging markets and the travel retail channel, as well as prestige beauty share gains vs. mass beauty. We believe the top line will be driven not only by increased penetration in emerging markets, but also by pricing (~200 bps) in a beauty category that generally has lower demand elasticity relative to many other product categories

Philip Morris

Here’s David Adelman’s take:

PM operates in an inherently attractive industry, with high profit margins and substantial free cash flow, enabling robust total shareholder returns. PM benefits from significant geographic diversification, with exposure to emerging markets’ growth and developed markets’ high margins. Strong underlying pricing power has led to consistent operating profit growth, and recently PM has been bucking industry trends by growing volumes. Meaningful share repurchases, in combination with a growing dividend (3.7% yield), contribute to reliable returns.

And the risk of more tobacco bans? Adelman doesn’t seem too worried. He writes:

Although recent news around plain packaging (PP) in the UK is a reminder of regulatory risk in Tobacco, we see limited risk of further unexpected negative developments (e.g., disruptive excise tax increases) in 2013 (and see a good chance PP will not be instituted in the UK, where PM is under-indexed). Market diversification is a major asset in this respect, as the company: (1) has meaningful exposure to high-growth emerging markets, as well as (2) high-margin developed markets, and (3) maintains a buffer against idiosyncratic underperformance in individual markets (e.g. the Philippines in 2013). We view the shift toward greater profitability from Asia (and away from the EU) as another positive trend.

American Tower has gained 0.4% to $76.41 today, Estee Lauder ticked up 0.1% to $65.09 and Philip Morris International has jumped 0.8% to $91.30.

About Emerging Markets Daily

Emerging markets have been synonymous with growth, but the outlook for individual nations is constantly changing. Countries from Brazil and Russia to Turkey face challenges including infrastructure bottlenecks, credit issues and political shifts. Barrons.com’s Emerging Markets Daily blog analyzes news, data and research out of emerging markets beyond Asia to help readers navigate the investment landscape.

Barron’s veteran Dimitra DeFotis has been blogging about emerging market investing since traveling to India and Turkey. Based in New York, she previously wrote for Barron’s about U.S. equity investing, including cover stories and roundtables on energy themes. Dimitra was among the first digital journalists at the Chicago Tribune and started her career as a police reporter at the Daily Herald in the Chicago suburbs. Dimitra holds degrees from the University of Illinois and Columbia University, where she was a Knight-Bagehot Fellow in the business and journalism schools. She studies multiple languages and photography.